IFR’s German Corporate Funding roundtable was held via video call on December 13 with a panel comprising issuers (Knorr-Bremse and Vonovia), an investor (DWS) and banks (Commerzbank and HSBC). The discussion focused on corporate bond market activity and how the suite of economic and geopolitical headwinds had affected activity and pricing in a year that will be remembered for uncertainty and volatility.
The mood of the capital markets had been positive heading into 2022 even if some of the factors that came into sharper focus as the year progressed were already present, including the prospect of quantitative tightening, rising rates and inflation. The shuttering of the ECB’s corporate sector purchase programme and how it would affect the corporate bond market was a well-rehearsed tale.
The bond market did grind to a halt in February but showed a degree of resilience by reopening in reasonably short order and it quickly regained quasi-normality, albeit with the focus of attention shifting in mid-year from Ukraine to inflation, interest rates and economic growth.
The dramatic switch from a seller’s market to a buyer’s market in bonds as the rate and spread environment shifted up was more rapid than anyone had expected. At certain points in 2022, pricing corporate bonds had been something of a head-scratcher. Beyond the rise in benchmark rates, secondary markets were illiquid and there was a discrepancy between secondary levels versus benchmark bonds and swaps. What that meant for pricing new issues was tough to figure out.
One statistic that came up was telling: by the date of the call on December 13, there had been 119 zero corporate issuer days compared with a little over 60 in 2021. That’s a window market par excellence. Prior to Russia-induced market volatility, there had been some discussion that corporate bond valuations had become unreasonable from a fundamental credit perspective so there were expectations that a correction was overdue. And boy did we get one.
With benchmark bond yields higher and credit spreads wider, it’s clear that the corporate bond market now offers investors attractive entry points. Corporate balance sheets are also generally stronger, having broadly recovered from the effects of the pandemic. And of course inflation is positive for debt leverage. Clients who had steered clear of corporate bonds because of the paltry returns they previously offered picked up the phone to asset managers again to update their asset allocation strategies.
On the flip side, borrowers have seen their levels skyrocket; something they are understandably not overjoyed about but have taken in their stride. The borrowers on the call talked about their reactions to the change in issuing conditions and actively looked at a variety of funding options.
Participants on the call said they were constructive to moderately optimistic about this year. Greater investor scrutiny and divergent impacts from whatever happens in the economy could lead to greater spread differentiation between sectors and credits. Issuers, meanwhile, will need to stay on the lookout for ways to broaden their investor bases to retain access to capital.
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